It was not too long ago that the city of Montebello was facing a projected five-year, $17.3 million deficit and having trouble securing a loan to help it get through a severe cash crunch to pay its bills.

A recent audit of the city’s finances now shows that the city may be on the road to recovery, with as much as $7 million in revenues not currently allocated.

While the audit findings are good news to city officials, Montebello’s city administrator is warning they are not yet out of the woods. City Administrator Francesca Tucker-Schuyler is cautioning city council members and city employees that in 2014 Montebello must start to make 20 annual payments of $1 million each on a multi-million dollar debt obligation.

Through a combination of cost-saving measures, including cuts to city services, contract re-negotiations and fund transfers, Montebello had a $7.2 million surplus in its general fund by the end of the 2011-2012 Fiscal Year, an increase of $2.2 million from the year prior, according to the audit by accounting firm Vazquez & Company that was presented at a city council meeting earlier this month. Most of the cut to deficit, however, was the result of the city restructuring a agreement made in 2000 with the city’s redevelopment agency that resulted in the agency pre-paying the city $13.5 million to help cover the city’s potentially crippling shortfall.

“The city has put a lot of effort into managing its financial resources and it’s showing up in the general fund,” said Peggy McBride, a partner at the firm.

However, only around $500,000 of that surplus is a reflection of increased sales tax revenue and decreased spending by the city, Tucker-Schuyler explained. She said the remaining $1.7 million was a one-time collection from a previous credit agreement with the former Redevelopment Agency (RDA).

The audit also looked at enterprise-business type funds for the city that has desperately tried to attract large businesses to the community to make up for the $2 million in economic development revenue lost by the state’s decision to dissolve all of the RDAs in California.

That created a huge financial challenge for the city, said Tucker-Schuyler.

According to the audit, Montebello sustained losses in several of its operations, including a $360,000 in the water utility fund, a $339,000 loss by the city’s detention center and an almost $300,000 loss at the city-owned Montebello Golf Course.

It’s important to look at all city funds, and not just the General Fund, if you want to know the “financial health of the city as a whole,” said McBride.

She told the council those losses are “manageable,” including the nearly $4 million deficit owed to the Hilton fund. She did advise, however, that they look at the cost of operating these businesses in order to eliminate the losses.

“Everything is about perspective,” said Tucker-Schuyler. “We have made a recovery in the past two years and the findings in this are far less significant in comparison to the previous year.”

She said the city still has no plans to sell off its golf course or contract with the county for its public safety services, two previous recommendations that riled residents. She told EGP losses incurred by the city’s detention center —jail —are actually less than if they had to pay to transport inmates to the County.

Tucker-Schuyler told EGP that the city must find a way to create revenue by growing rather than cutting. She said city elected officials are not in favor of raising taxes, like the half-cent sales tax or utility user tax increases approved by voters in nearby cities. Montebello is instead choosing to focus on local economic development to help raise General Fund revenue, she said.

But the city must act quickly because beginning October 2014 they must start to pay back the bond debt, which will cost about $1 million a year for the next 20 years, Tucker-Schuyler said.

“Come 2014 this city must have additional revenue of at least $1 million to make sure the debt service is met.”

At the end of the 2009-2010 fiscal year, Montebello faced a $6.7 million budget deficit. That same year, state auditors said the city had improperly handled its finances, including federal housing funds, and the city’s credit rating took a dive, making it hard for the city to borrow the money to cover its bills.

Tucker-Schuyler told EGP that although state auditors included findings of funds being used on dinners and golf embroidered polo shirts, she said the state’s 2011 audit found nothing illegal in nature and nobody was arrested for mishandling money in the city. She said the city and its finances were “mislabeled” by outside parties. She attributed the problems to poor accounting practices and issues arising from the former RDA.

The corruption scandal involving city officials in the city of Bell, the political season, and the state’s process of dissolving RDAs is what led to the city’s state audit in 2011, said Tucker-Schuyler.

“Unfortunately Montebello happened to be…a victim because these three things lined up,” she said.

By the end of the 2010-2011 fiscal year the city no longer carried a negative balance and ended the year with a $5 million general fund balance.

The main contribution to the city’s financial turnaround was the restructuring of a legal agreement between city and its Redevelopment Agency to prepay its financial obligations in a one-time payment of $13.5 million in 2011.

Following the audit presentation, council members agreed to conduct a mid-year budget review to make the city remains on track.

“We have a positive momentum going,” observed Tucker-Schuyler. “We’re conserving our cash, recognizing that there are some urgent matters that need attention, and keeping an eye on the ball knowing that we must conserve the cash for debt services.”